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Trading the Pandemic - Are You Listening?

Opening Whisper

Last week U.S. Senate Majority Leader, Dr. Bill Frist attempted to raise the level of awareness of an avian flu pandemic. In a speech to the National Press Club on December 8, Frist cited a soon to be released Congressional Budget Office report prepared at his request, which apparently will outline a potential impact of $675 billion to the U.S. economy. This amounts to a five percent loss in GDP.

Quoting From Frist's Office Press Release

"A $675 billion potential hit to our economy -- almost half of which is brought on by fear and confusion that can be eliminated by planning -- gives us every reason to begin preparing a prescription and implementing a course of action today," Frist said.

The CBO report assumed that a severe pandemic would infect 90 million people in the United States and result in two million U.S. deaths. Thirty percent of the workforce would become ill and miss at least three weeks of work. (Unless more of you decide not to take mass transit or car pools or to go to work at all in order to avoid potentially infected co-workers. Would you send your kids to school?)

In addition to a reduction in the labor force, the supply-side impacts would also include disruptions in the supply chain (read that as irrational hoarding, hi-jacking and looting) and a shortage of health care personnel and medical care (healthcare workers at risk themselves). In total, supply impacts would cause the nation's GDP to decline by three percent in the year the pandemic occurs.

The impacts to demand would also be severe, due in part to the public's fear and uncertainty -- much like what was witnessed during the 2003 SARS outbreak. Industries (add schools, sports arenas, churches, synagogues, shopping malls) where customers are forced to congregate would take a severe hit: demand would fall by 80 percent in entertainment, arts, recreation, restaurants and lodging, and retail trade would drop by 25 percent (except for food distribution). A fear of travel, coupled with government-imposed restrictions, would lead to a dramatic decline in domestic and international travel. In total, demand-side impacts would result in a two percent drop in GDP. Unquote - italics are mine.

While not addressing the world economic impact, Senator Frist's speech seemed to make 3 points;

  • Severe economic damage will occur.
  • Much of the damage will be due to "irrational fear".
  • The urgent need to prepare and manufacture a vaccine and prepare healthcare facilities to cope with the crisis.

Some Questions and Thoughts

My questions would be; How long would this pandemic last? Would it last just one quarter, or two, or could it span two flu seasons? Would the fear of the pandemic occurring in a second season produce continuing economic impacts?

"An epidemic dies out eventually if each person who is infected in turn infects less than one person on average. So we don't know exactly how long it might take. It could be anywhere - 12 or 24 months. I cannot tell you an exact number." - Dr Olusoji Adeyi, Coordinator of Public Health programs at the World Bank

The amount of fear and its impact seems to be tied directly to the development, production and availability of Tamiflu-like products to ease symptoms and a vaccine for prevention. Even if a vaccine is produced, it appears from the speeches and news reports we've heard, that manufacturing it in volume would be the biggest problem. Supplies might be very limited for the duration of the pandemic.

Profiting From Disaster?

It seems so cold to ask this question in light of what could be a personal disaster for many of us, but, after all, this is not a healthcare newsletter; so here goes. What do these impacts mean for the stock market and how can we profit from what might be a world-wide disaster?

There might be certain sectors which could profit from the pandemic. Consider that people would be staying home, not eating out, hoarding food (in brief visits to the grocery stores, or telephoned delivery) and doing ALL of their shopping online with delivery by UPS, DHL, Fedex and Dominos. Healthcare stocks and 'big pharma' may profit from the over-reaction and the search for potential medicinal options.

How Would It Impact Our Trading Strategies?

Even though some companies and sectors may see higher demand and profit, it seems certain that the stock market would take a big hit. It might take the form of a slow-motion demise as news reports of the spread of the disease, the number of deaths, and the limitations of the healthcare system increase in frequency and severity. Might there be some trigger that would start the market down-turn? Yes. The news and confirmation that the flu virus has mutated from the bird-human contact to human-to-human transmission capability will herald the high for the markets and a potential long-term decline.

For Market Listener trend followers, we should have no need to change our trend indication strategy to permit us to follow the market's lead lower. We may have to widen our stops to accommodate the inevitable "salvation rumors" that would punctuate trading on Wall Street with brief bullish spikes. In that case, we might want to hunker down and use an exponential moving average as our stop to filter out the daily noise. Our draw-downs would increase, but that is the price to pay for filtering the noise.


Do you remember how the markets closed out 2004 and started 2005? The selling was significant in January. Will it be a repeat performance in early 2006? We are nearing a potential inflection point in the market. Your subscription to the Listener could help you prepare for the next market "whispering".

This report is only a partial weekly report without trading signals, stops and trading instructions for the week ahead.

Market Listener Trader subscriptions are now available on our website: Go to www.MarketListener.com and click on "Subscribe". Market Listener Traders get complete reports and trading signals. Email alerts and timely website updates for Members are generated based on market conditions.

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There might also be a reason for us to shift our index strategy from the technology-laden Nasdaq to the S&P 500, Dow Jones Industrials or the small-cap Russell 2000 index. Our ratio charts would quickly tell us which indices would be leading the negative trend. Mutual fund traders would continue to have leverage with Rydex or ProFunds. ETF traders would have their normal access to QQQQ, SPY and DIA trading and options capabilities.

Is This Another Y2K "No-Show"? Nothing to Sneeze At!
I think that you would agree with me that the media and political hype seems to have a particular urgency about it which is very reminiscent of Y2K. Perhaps, by the grace of the Almighty, we might never see a mutated form of the virus which becomes the human-to-human variety. But many world health-care leaders and scientists advise that human contagion of the virus is not a matter of if, but when.


What Is The Current Market Sentiment?

The CBOE Total Put/Call Ratio weekly chart below may be confirming a short-term top though sometimes this sell alert is a bit early.

2 Year Weekly - CBOE Total Put/Call Ratio ($CPC)

The November 2005 low in the CPC was much earlier than the low that occurred in December of 2004. This may make it more difficult for the recent rally to carry all the way to the end of the year. Both VIX and CPC are closer to bullish sell signal extremes than they are to bearish buy signal extremes (in a contrarian view).

Our Trading System - What The Numbers Are Telling Us
{The Listener Trading System Model and signals are only available to subscribers.}

Trend Compliance: The market appears to be making a slow-motion roll-over, but these can be reversed quickly since they may be a plateau from which to move higher. The daily MACD (18-35-12) on the ZZ chart below appears near to confirming the next trend leg down.

1 Year - NDX ZigZag (5%)

The Markets Are Whispering - Are You Listening?

Market Listener Trader Signals & Results

33.3% 10.6% 36.4%
YTD 6 Month 12 Month
Market Listener Trader YTD return inthe hypothetical account
(Updated as of Dec. 9)

Trigger Inputs
or Other
ML Signal 3
--- --- --- Recent Signals Not Shown
Oct 31, 2005 Buy Buy Buy Sell Cash Stop Cash
Oct 28, 2005 Sell Sell - Sell   Sell
Oct 19, 2005 Sell Buy - Sell Cash Stop Cash
Oct 05, 2005 Sell Sell Sell Sell   Sell (100%)
Sep 30, 2005 Sell Buy - Sell   Sell (50%)
Sep 15, 2005 Sell Sell - Buy   Sell
Sep 14, 2005 Sell Sell - Buy Cash Stop Cash
Sep 07, 2005 Buy Buy Sell Buy (mod.)   Buy
Sep 06, 2005 Buy Buy Sell Neutral Cash Stop Cash
Aug 08, 2005 Buy- Buy Buy Buy   Sell
Aug 04, 2005 Buy Buy Buy Buy Cash Stop Cash
July 08, 2005 Sell Buy Buy Buy   Buy
June 24, 2005 Sell Sell Sell Buy- Cash Stop Cash
May 13, 2005 Buy Buy Buy Sell++   Buy
May 06, 2005 Buy Buy Buy Sell+ Cash Stop Cash
Feb 11, 2005 Sell Sell Sell Sell   Sell
Feb 04, 2005 Sell Cash Sell Sell Cash Stop Cash
Jan 14, 2005 Sell Sell Sell Buy   Sell
Dec 31, 2004 Buy Buy Buy Sell Proprietary Cash
Oct 15, 2004 Buy Buy Sell Buy   Buy
Oct 08, 2004 Buy Buy Buy Buy Cash Stop Cash
Oct 01, 2004 Buy Buy Buy Buy   Buy
Sep 24, 2004 Buy Buy Buy Buy Cash Stop Cash
Aug 20, 2004 Sell Buy Buy Sell+   Buy
Jul 16, 2004 Sell Sell Sell Sell   Sell
Jul 02, 2004 Buy Sell Buy Buy Cash Stop Cash
May 14, 2004 Sell Sell Sell Sell Proprietary Buy
Apr 30, 2004 Sell Sell Sell Sell Cash Stop Cash
3 This Market Listener signal is our base signal. The MACD is our primary weekly input, but can be "out-voted" by the other faster or proprietary indicators on a daily basis when we need to go to cash to implement our Fault Tolerant Cash Safety Stop (FTCSS). You should not base your trading on this or any other single indicator. Our trend following system can dynamically adjust parameters based on current market conditions including volume and sentiment factors. We also employ proprietary indicators which can override the current model.


Mutual Fund Restricted Trader (MFRT)

Mutual Fund traders with trading restrictions (timing or significant fees) are given longer-term trading signals as a part of their Market Listener Trader subscription

NOTE: The Market Listener Trading Signal is different and much quicker than this Mutual Fund Restricted Trader (MFRT) signal.

Listen To What He Says

KJV Micah 5:2 But thou, Bethlehem Ephratah, though thou be little among the thousands of Judah, yet out of thee shall he come forth unto me that is to be ruler in Israel; whose goings forth have been from of old, from everlasting.

KJV Matthew 2:1-6 Now when Jesus was born in Bethlehem of Judaea in the days of Herod the king, behold, there came wise men from the east to Jerusalem, Saying, Where is he that is born King of the Jews? for we have seen his star in the east, and are come to worship him.

When Herod the king had heard these things, he was troubled, and all Jerusalem with him. And when he had gathered all the chief priests and scribes of the people together, he demanded of them where Christ should be born. And they said unto him, In Bethlehem of Judaea: for thus it is written by the prophet, And thou Bethlehem, in the land of Juda, art not the least among the princes of Juda: for out of thee shall come a Governor, that shall rule my people Israel.

I am working on the art of listening and hope that you are also.

Best Profits,

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